As most readers have probably heard by now, January inflation increased by more than expected at 0.4% from the previous month. Rather than focus on the big number, I investigated a few of the smaller categories in the BLS data, particularly in foods affected by commodity prices. One item immediately jumped out – the fats and oils category. Since last month, seasonally adjusted prices in this category increased by 2.1% – that’s enormous. Since soybeans are a crucial ingredient to vegetable oil, this spike is fairly easy to explain.
Let’s take a look at a few more categories in the data. Remember, the charts below are consumer prices. Coffee is a good start. Since last year, the price has increased by 15.9% from $3.81 per lb of ground coffee to $4.42 per lb. (For some reason, the coffee data had a large gap in 2009; as a result the chart begins in 2010.)
Next, let’s take a look at sugar prices per lb. Since 2007, sugar has risen 25.6% from __spamspan_img_placeholder__.52 per lb to __spamspan_img_placeholder__.65 per lb.
The last chart shows soft margarine prices. Again, since vegetable oil is a part of margarine, the price will necessarily be affected by spikes in the soybean market. Since 2007, the price has increased by 50% from .15 per lb to .72 per lb.
Hedgers are a big reason why consumer prices lag the commodity market. Major companies have already locked in their purchases and prices months ahead in the futures market, so they can delay price increases.
The second factor is the elasticity of the products. That’s a fancy economics term for the change in demand in response to a change in price. When a product is inelastic, demand changes little with a change in price. A good example is coffee. Most coffee drinkers do not alter their consumption based on price fluctuations. Of course, companies have calculated the elasticity of their products. Since inelastic products are less responsive to price, hedging departments pay less attention to covering these costs. For example, coffee prices can be easily passed down to consumers (as a rule of thumb, the more elastic a product, the bigger the hedges). Hence, elasticity can be a good predictor of how quickly consumers will feel the impact of spikes in the commodity markets.
